Alaska's oil production tax is broken, Part 2

Second of two parts

In Part 1 of this commentary, I explained the collapse of our production tax structure and suggested ways to correct and test it to be sure it is working. Here in Part 2, I will directly address the primary arguments suggesting we should take less than our fair share.

Inefficient state spending

Some suggest we should take less because the state government is spending wastefully.  Alaskans should disagree.  As the owners of our oil, we should recover our fair share whether the state spends wisely or foolishly.

Over-taxation

Some suggest the oil industry is being overtaxed.  Alaskans should disagree.  Alaskans are entitled to a one-third fair share as owners of the oil ‒ getting our share is not a taxation issue but a question of ownership and stewardship.

Health of the major producers

Some suggest we take less for the health of three major producers. Alaskans should disagree.  The three major producers have made and are continuing to make substantial profits from our oil while we forgo billions of our fair share as owners and spend billions of our savings.  It is time for our primary concern to turn to the health of the state, the economy, independent producers, and other industries.

Moreover, property-related taxes, such as a production tax, should be paid regardless of claimed profitability.  This is why every other oil state has a production tax based on gross revenues rather than on net revenues.

We also need sufficient petroleum revenues to efficiently support a viable and competitive oil industry with independent producers. Currently, our revenues used to give the oil industry incentive are being massively misallocated ‒ we need more support for independent producers willing to explore for additional resources and less support for the three major producers harvesting Prudhoe and Kuparuk.

Finally, there is a natural evolution of an oil-producing region such as the North Slope. Major producers with higher cost structures often build out the initial infrastructure and capture the largest fields in an oil region. Over time, as field economics become more challenging, there is a natural progression to producers with lower cost structures. We should not have a net production tax that discourages this natural evolution and rewards the highest-cost majors for indefinitely harvesting our major legacy fields to fund projects outside of Alaska.

High costs of production

Some suggest we should take less because the cost of production in Alaska is too high. Alaskans should disagree. Alaskans should not take the risks associated with the three major producers' costs. The major producers are best able to manage their own costs and should bear the risks of not managing them prudently. Further, the three major producers are among the highest cost-producers in the world. Alaskans should not take less due to their inefficient spending.

In addition, the major producers' claimed costs are not reliable. Their claimed costs have not been audited; they average costs, which shields the true profitability of the low-cost major legacy fields such as Prudhoe and Kuparuk; and their claimed costs include substantial costs that are improper.

Additionally, their claimed costs include excessive and noncompetitive payments to their own profit centers.  For example, they deduct the payments to themselves for the transportation of our oil through their pipelines and tankers.  These payments to themselves are excessive and noncompetitive. To give one of many possible examples, the Regulatory Commission of Alaska has held that from 1977 through 1996, the major producers over-collected $13.5 billion in excess profits.  This entire $13.5 billion in excess profits was claimed as costs of production and improperly deducted from their production taxes. Such excessive and noncompetitive payments by the three majors to themselves should not be deducted from their production taxes. In short, Alaskans need to understand that costs are not always costs, but are often additional profits, when dealing with the three major integrated producers.

Benefits of SB21

Some suggest we should take less because of the benefits of Senate Bill 21, the current tax regime. Some suggest this year SB21 is bringing in $100 million more than ACES, the previous tax regime. Alaskans should disagree.

For different reasons, neither SB21 nor ACES perform well at lower oil prices.  Both would have to be significantly modified to realize our fair share under lower oil prices. Further, while ACES brings in a little less than SB21 during periods of lower oil prices, ACES brings in a lot more than SB21 during periods of higher oil prices. Comparing the revenues that would have been generated under SB21 and ACES from 2007 to date reveals ACES would have collected $11 billion more. Essentially, for every $1 more in revenue SB21 is bringing in this year, it will cost us $100 in revenue over time.

Some suggest SB21 has resulted in more production. But SB21 is not the cause of increased production ‒ the gain of a few thousand barrels per day is the result of projects under development for years if not decades before SB21 passed into law.

Alaskans voted

Some suggest we should take less because Alaskans voted not to repeal SB21.  Alaskans should disagree. The vote came before the price of oil declined and it became obvious how poorly SB21 performs in periods of lower oil prices.

The vote was also based upon representations of new jobs and substantially increased production. Neither of those representations has proven true. Jobs have substantially declined, and SB21 has had no significant impact on production.

Under SB21, we are forgoing several billion dollars of our fair share in annual revenues to incentivize the three majors to do what they are already legally obligated to do under their leases ‒ develop and produce our oil.  Instead, Alaskans should demand they honor their lease commitments. Ironically, we are doing such a poor job of incentivizing additional investment that we would be much better off to simply get our fair share and give all of it back to the oil industry for capital projects in Alaska. This would be much better than allowing billions to simply leave Alaska in the hope the majors will leave some part of our fair share in Alaska.

Finally, we simply cannot do any worse at protecting our interests. If the Legislature is unable to find the political will to pass a reasonable production tax, perhaps it is time for Alaskans to vote again. This vote should be first on Alaskans' legislators and second on whether to adopt a simple progressive production tax based on our fair share of one-third of the gross market sales.

Conclusion

Alaskans need to be clear ‒ there are only three potential sources of revenues to close our massive annual $3.5 billion deficit:  1. three major international producers (through an increased production tax); 2. us (through an income tax, sales tax, user fees, and reduced dividends); or 3. our children (through the Permanent Fund). While we may need some combination of these three sources, Alaskans should be clear that recovering our fair share should be the first place we look, not the last.

Former Gov. Jay Hammond anticipated this dilemma and was also clear that before Alaskans should agree to user fees or a broad-based sales or income tax (much less use the Permanent Fund earnings or dividends), we should first ensure we are recovering one-third of the gross value for our oil. Specifically, he stated, "(F)irst, oil taxes should be adjusted to redeem the State's initially agreed upon one-third share. Only then should user fees or a broad based sales or income tax be imposed if we lack sufficient revenues to fund essential government services." Alaskans should agree.

Robin Brena is a longtime oil and gas attorney who recently was called to testify on petroleum revenue issues before the state House Resources Committee. He was the chair of the Oil and Gas Subcommittee for Gov. Bill Walker's transition team.

The views expressed here are the writer's and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary@alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com.